India’s Chidambaram Irked as Subbarao Defies Rate-Cut Call

RBI Governor Duvvuri Subbarao
Duvvuri Subbarao, governor of the Reserve Bank of India (RBI). Photographer: Dhiraj Singh/Bloomberg

India’s central bank resisted calls from Finance Minister Palaniappan Chidambaram for lower interest rates, prompting him to say the government will revive economic expansion by itself if necessary.

Governor Duvvuri Subbarao kept the repurchase rate at 8 percent to damp price increases, while reducing the cash reserve ratio to 4.25 percent from 4.5 percent to support lending, the Reserve Bank of India said in Mumbai yesterday. Borrowing costs have remained unchanged since a 50 basis-point cut in April.

Chidambaram called for cheaper credit earlier this month to back a government push to spur growth, and pledged on Oct. 29 to contain the budget deficit as officials try to increase scope for a rate cut. While the monetary authority signaled it may ease policy in January-to-March as inflation cools, the finance minister said boosting the economy is already a key task.

“Growth is as much a challenge as inflation,” Chidambaram told reporters in New Delhi yesterday after the Reserve Bank’s decision. “If government has to walk alone to face the challenge of growth, then we’ll walk alone.”

An inflation rate near 8 percent curbed Subbarao’s scope to join counterparts from Brazil to Thailand in extending rate cuts as the global recovery falters. Nineteen of 33 analysts in a Bloomberg News survey predicted no change in borrowing costs, with 13 forecasting 7.75 percent and one 7.5 percent.

‘Bit Peeved’

The reduction in reserve requirements, the fourth this year, is effective Nov. 3 and will add about 175 billion rupees ($3.2 billion) to the banking system, the Reserve Bank said. The 25 basis-point cut takes the cash reserve ratio to a 36-year low.

“Both the government and the RBI have shared goals,” Subbarao said in an interview with Bloomberg Television India today. “We want to see growth improving, we want to see inflation coming down and remaining at low levels, and the collective endeavor, as well as our individual efforts, are focused on achieving those objectives.”

Prime Minister Manmohan Singh’s administration started a policy revamp on Sept. 13, including fuel-subsidy curbs and a push to spur investment. That snapped months of gridlock over how to bolster growth. The rupee is up 3 percent versus the dollar since then, paring its one-year drop to 8.5 percent.

“The central bank is still waiting to see the government effectively implement the reforms it announced before it cuts interest rates,” said Robert Prior-Wandesforde, an economist at Credit Suisse Group AG in Singapore. “The finance minister was probably a bit peeved that the RBI wasn’t prepared to take his word for it.”

Further Easing

The rupee strengthened 0.3 percent to 53.815 per dollar at the close in Mumbai today, while the BSE India Sensitive Index of stocks rose 0.4 percent. The yield on the benchmark 8.15 percent bonds due June 2022 rose four basis points, or 0.04 percentage point, to 8.22 percent from 8.18 percent yesterday.

“The baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of 2012-13,” the Reserve Bank said. “The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic.”

The central bank added that “it is critical that even as the monetary policy stance shifts further towards addressing growth risks, the objective of containing inflation and anchoring inflation expectations is not de-emphasized.”

The Reserve Bank raised its inflation forecast to 7.5 percent by March 2013 from 7 percent, adding the pace of price increases is expected “to rise somewhat” in the October through December period before easing in the following quarter.

Growth Outlook

The projection for economic growth was cut to 5.8 percent for the year through March 2013, from 6.5 percent, on moderating investment and consumer spending, declining exports and the impact on farming of a weak monsoon season.

The government last month raised diesel prices about 14 percent and limited supplies of subsidized cooking gas, while opening industries such as retail to more foreign investment.

Chidambaram this week set a budget-deficit goal of 5.3 percent of gross domestic product for the 12 months that began April 1, narrowing to a nine-year low of 3 percent by 2017.

The government will seek to maximize revenue collection and control expenditure, he said today. He said on Oct. 12 that more rupee gains will help damp costs and that “interest rates must come down.”

Subbarao reduced rates in April for the first time since 2009 and has said that move “frontloaded” reductions on expectations of fiscal consolidation.

‘Effective Action’

He has also cut lenders’ reserve ratios by 1.75 percentage points in 2012. The central bank has said its comfort zone for inflation is about 5 percent.

“As recent policy initiatives by the government start yielding results in terms of revitalizing activity, they will open up space for monetary policy to work in concert to stimulate growth,” the central bank said, adding the administration’s steps need to yield “effective action.”

Singh is trying to tackle the widest fiscal shortfall in major emerging markets and restrain a trade deficit to avert a credit-rating downgrade. The budget gap was 5.8 percent in the year ended March. Standard & Poor’s predicts it will widen to about 6 percent this fiscal year.

Indian inflation, fanned by food and fuel costs, accelerated to a 10-month high of 7.81 percent in September. GDP rose 5.5 percent in the three months through June from a year earlier, below Singh’s goal of about 8 percent.

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